House prices are falling across the globe

The Economist

“WHAT happens here, stays here” is a slogan used to attract tourists to Las Vegas. Sadly, it is not true of the state of the city’s housing market. In September, they were 31.3% lower than a year ago, according to an S&P/Case-Shiller index of American house prices, and Vegas’s problems are now spreading all over the world. According to our house-price indicators (see chart), America’s housing market is leading the way down for the 20 countries covered. But the situation is even worse than it appears. Compared with the second quarter, prices fell in 11 of the 16 countries for which third-quarter data are available. Research suggests that a long, global slump lies ahead.

In America, the collapse is striking both for its severity and its breadth: home prices fell in every city covered by Case-Shiller’s 20-city composite index in September. On a more positive note, America’s Mortgage Bankers Association said on December 3rd that home-loan applications, which are an early indication of demand for housing, surged at the end of November. This followed a fall in long-term rates after the Federal Reserve pledged to buy up to $500 billion of mortgage-backed securities issued by government-sponsored entities such as Fannie Mae and Freddie Mac, and $100 billion of their debt. However, many such loan applications are turned down, especially in tough economic times.

For an indication of how far the downturn has spread, look at China. House prices are still slightly higher than they were a year ago, but in the third quarter they fell. In big cities, the picture is even worse. Shanghai’s house prices fell by 19.5% in the third quarter, says Savills, a global property company. Construction of homes, offices and factories fell by 16.6% in October, according to Macquarie Securities. The firm expects construction activity to slump 30% in 2009, after a 9% expansion in the first nine months of this year.

Barclays Capital says house prices may fall by about 15% over the next two years, hitting their long-term trend levels next year, then overshooting on the downside for another year. Those hoping to bet on a turn in the market may have more luck at a Vegas blackjack table.